At 13.47, eastern standard time, on February 20, 2008, the spot price of Nymex crude oil traded at $100.86. This was the second consecutive trading session when oil had changed hands at a spot price above $100 a barrel. Yes, we’ve had the futures price move above this historical level before. But now it’s real and immediate – the price might wax and wane from here, yet we really are in the era of One Hundred Dollar Oil.
I love watching the oil market – although I should hastily add that I do not consider myself to be an expert on this ubiquitous commodity. But it fascinates me how this market in particular gobbles up every piece of available news and data – everything goes into the mix, from nutty weather forecasts to Chinese construction reports, by way of macro analysis of the US economy. Every last jot of information potentially has an impact on the underlying price of oil.
Writing a note to his clients this weekend, Stephen Pope, the chief global market strategist at brokerage Cantor Fitzgerald Europe, noted the spread of factors that were widely cited last week as the spot price spiked through $100: “Speculation, the US economy, Opec reductions, refinery issues, rumour of the murder of a Nigerian militant leader, and Venezuela becoming vocal once again.”
Clearly, to track and predict the crude price you need to be well read. But let’s run through some of those factors.
Speculation: Clearly, we have seen exponential growth in the number of speculators playing the oil market over recent years. But it is routinely stated speculators – ranging from hedge funds to proprietary trading desks at investment banks – are somehow responsible for anything up to 40 per cent of the price rises we have seen. So, if spot crude was trading just below $70 last August, some $12 of that is directly attributable to speculative activity.
But I find that difficult to accept, because it seems to imply that as there are now more market participants setting the benchmark price – pure financial players alongside genuine suppliers and consumers of oil – that somehow adds up to a net increase in demand.
Sure, at any given time the herd-like behaviour of speculators can move a price out of kilter with the fundamental value of the underlying asset – in this case oil. But the simple existence of speculators does not in itself push the price up. It is only if those speculators believe the price will increase in the future, their buying activity now will push crude higher.
US economy: This is clearly a crucial factor – and we can only guess where the crude price might be if the American economy were not looking at the most painful slowdown in a generation. Americans consume more than three times the oil than the next largest consuming nation – China.
Opec reductions: For what it’s worth, there is an assumption in London and New York that Opec will shave production when it next meets on March 5, having avoided a cut in February. The reason? A straightforward understanding that warmer weather as the northern hemisphere goes into spring, combined with a US slowdown, will limit demand.
Refining: As Stephen Pope points out, “Any future expansion of refining operations will encounter ever more stringent product quality and environmental regulation as well as demands from customers who seek shorter delivery times and shareholders who want shorter payback periods.”
It is worth pointing out Big Oil has to contend with the rising geo-political threats, where threats of seizure or terrorist activity can only to be expected to rise in line with the crude price. Everyone wants some of the petrodollars.
Which brings us to Nigeria and Venezeula. Early last week it was rumours of the death of a Nigerian rebel, Henry Okah, that first got the crude price moving higher on the expectation of retaliatory action. The rumour turned out to be false, but it has again drawn attention to the extreme fragility of oil operations in the area. Put simply, the oil firms charged with keeping Nigeria’s oil tap on are increasingly finding the area just too dangerous to operate.
Nigeria’s woes are often discussed in the same breath as those of Venezuela, where the president’s threats of cutting off oil supplies to the US have encouraged some to forecast oil at $200, not $100. But let’s just take Pope’s conclusion on this: “With the greatest of respect to the office of the elected leader of any sovereign state, I have to place Hugo Chavez in dock along side Robert Mugabe when it comes to political integrity. The trouble is Mugabe is just a joke whereas Chavez, who is an economic joke, is a pain in what not!”
Paul Murphy is Associate Editor of the Financial Times
Every jot of data impacts oil prices